Structured note sales in February up 21.5% year over year; investors shrug off Friday sell-off

By Emma Trincal

New York, Feb. 26 – Structured products agents priced $282 million in 98 deals in the shortened holiday week ended Friday, according to preliminary data compiled by Prospect News.

Revised figures for the previous week, which was the second of the month, showed a $993 million notional in 306 offerings, a significant size for this early part of the month.

So far, February’s tally is slightly lower than January’s, but the gap is likely to fade as more deals get filed with the Securities and Exchange Commission and make their way into Prospect News’ database.

Sales amounted to $2.378 billion this month through Feb. 21, an 8% decline from $2.586 billion during the same time in January. The number of deals remained relatively stable at 672 versus 695 last month.

Huge gains for year

However, when compared to last year, those first three weeks of February represent a 21.5% jump from $1.957 billion during the same time a year ago.

Because the last week of January was so strong with $3.416 billion, year-to-date notional sales have skyrocketed from $5.644 billion to $9.341 billion, a 65.5% rise.

“We’re only talking about two months. It’s a small sample size. But I’m glad we’re up,” said a structurer.

For this structurer, the trend is a continuation of what happened at the end of last year.

Volume rose sharply in November and December of 2019 compared to a very weak start of that year, which followed the Christmas Eve sell-off of 2018. February’s issuance volume was the lowest last year and January was the third worst period.

“If I had to guess why we’re up that much, I think it’s because the momentum of last quarter is carrying through. That’s why you’re seeing a very good first two months,” he said.

“The fourth quarter was very good. The first two months of this year are very good. This in my opinion is just a continuation of the same trend.”

Risk-off is back

The question of whether the new coronavirus scare, which has rattled the markets over the past four sessions, will have a negative impact on issuance remained open.

After rallying for two weeks and hitting an all-time high on Wednesday, the S&P 500 index reversed course and fell sharply on Friday leading to a 1% decline on the week.

The culprit was the rise in the number of new coronavirus cases outside of China, which undercut sentiment as early as Thursday as investors began to worry about the global economic impact of the virus. As it turned out, the end of the shortened holiday week marked the beginning of a sell-off which extended on Monday and Tuesday of this week with the Dow losing 1,000 points on Monday and 880 points on Tuesday.

Uncertainty about the U.S. presidential elections was also a factor contributing to increased volatility.

Low rates, sell-off

“The impact on our industry will depend on what the products are linked to,” said a rates-linked trader.

“The virus scare has affected the market. Stocks lost 2,000 points in two days. It’s a major sell-off, and everything is affected. The bond market has rallied by 25 basis points.”

The flight to quality led to a sharp bond rally. The yield on the 10-year Treasury dropped to 1.47%, near its July 2016 all-time low of 1.36%.

Pricing conditions

“It might encourage people to do more.,” this trader said.

One factor is the low level of interest rates, which will continue to push investors to seek income.

But the pricing conditions emerging from the higher volatility may help investors find the downside protection they need.

“If stocks are down 10% or 15% and you’re buying a buffered note with a 20% buffer, now you have a 30% buffer. It’s really good especially if the market is not down for fundamental reasons,” he added.

“Everybody is scared.”

A short-term scare

“But the real fundamentals are not that negative,” he said. “It’s because of this boogeyman, the virus.

“It’s going to have an impact. But it’s the kind of thing that can bounce back very quickly.

“In another 30 days there will be less uncertainty around the coronavirus. We’ll start to recuperate. Right now, we’re in the dark because a lot of the information comes from China so we don’t know the truth.”

Income, indexes

Last week saw nearly half of the volume in income products, according to the preliminary data. Just as with volume, an unusual trend was the overwhelming presence of index-linked notes, which made for 80% of the total versus 10% for single stocks.

The predominance of index notes is usually more representative of the final week of the month when the big wirehouses, such as Bank of America, place their block trades as those are rarely linked on stocks.

However, the weakness in single stocks may also be due to the earnings season coming to a close.

“It’s hard to tell why people pick indices versus stocks on any given week. Some people use indices as a hedge against long-only positions. Sometimes the decision factor is the entry level,” the trader said.

“Some top investors like Warren Buffet or Jamie Dimon for a while didn’t want to buy the market because of the lofty valuations.

Now the perception may have changed. Some may see the market as temporarily oversold.

“Now that we have this sell-off, they may look at deploying some cash,” the trader said.

Protection wanted

The structurer was also cautiously optimistic about structured notes issuance in the coming weeks or months.

“The virus concern might have an impact but it may not necessarily be a negative in our space,” he said.

“We’ve seen renewed interest and a lot of activity around buffers.

“When the market is volatile, two things happen. People are worried and they want to get protection, that’s one thing. The other is that higher volatility makes the terms better.

“Both things work in our favor; that’s why you have more issuance.”

The consequences of the coronavirus outbreak remain unknown. But the market is still near its all-time highs and investors are not even close to “capitulate,” he explained.

“The virus is not creating a structural change. People worry but they’re not giving up on the market. They still want to remain invested. They don’t want to miss out but at the same they worry. This is a good environment for structured products.”

Absolute return

One sure sign of investors worrying is the bid on dual directional notes – also known as absolute return. With $45.3 million sold in seven deals last week, this structure represented 16% of the market in volume.

The largest one and the second offering in size last week came from JPMorgan Chase Financial Co. LLC, which priced $27.61 million of six-year absolute return leveraged notes on the S&P 500 index. The note offers some limited amount of leverage with a 1.018 factor on the upside. On the downside, investors get absolute return gains if the index drops to a maximum of 35%. After that, they are fully exposed to the index’s decline from its initial level. Morgan Stanley distributed the notes.

Top deals

The top deal came from Barclays Bank plc with $35.53 million of trigger callable contingent yield notes due Nov. 24, 2023 linked to the worst performing of the Euro Stoxx 50 index, the Russell 2000 index and the S&P 500 index.

The annual contingent coupon of 8% is paid quarterly if each index closes above a 70% coupon barrier, but the unusual twist is the daily observation of this barrier. In addition, the notes are callable quarterly at the discretion of the issuer. Those riskier features along with the worst-of based on three underlying allowed for a 60% barrier observed point to point.

UBS is the agent.

Investors continued to enjoy the safety of index-linked notes versus stocks even if it meant an exposure to three underlying in a worst-of rather than to a single but highly volatile stock.

One example was the third deal issued by UBS AG, London Branch, which replicated the structure of the Barclays offering in a $17.17 million issue of trigger callable contingent yield notes with daily coupon observation.

The Euro Stoxx 50 index was replaced by the Nasdaq-100 index, and the coupon was 8.2% instead of 8%.

All other terms, including the maturity date, the American coupon barrier, barrier levels and the issuer call, were the same.

Last week’s top agent was UBS with 52 deals totaling $83 million, or 29.44% of the total.

It was followed by JPMorgan and Morgan Stanley.

JPMorgan Chase Financial was the No. 1 issuer with $80 million in 13 deals, a 28.28% share.

For the year, Barclays Bank plc is the top issuer with $1.48 billion in 252 deals, or 15.84% of the total.

© 2015 Prospect News.
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